Jorge Newbery, CEO, discusses how AHP’s successful business model impacts communities, one house at a time.
Zacks Private American Homeowner Preservation started out as a non-profit—what was your initial motivation for the organization?
Jorge Newbery The non-profit AHP's mission was to keep families at risk of foreclosure in their homes with viable, sustainable solutions. The for-profit shares the same mission, except now we have an additional mission, which is to generate high returns for our investors.
ZP What caused you to switch to a for-profit business model?
JN As a non-profit, we would help about 10% of the families who came to us for assistance because the banks and servicers were often not receptive to AHP's solutions. This was perplexing, as AHP's resolutions typically resulted in maximum financial recovery to the banks. AHP became a for-profit and started buying non-performing loans at big discounts from banks. This removed the impediment, as we now owned the loans at big discounts from banks and could dictate resolutions to the servicers. The big discounts result in high yields to our investors (9%-12% annually) and transformative solutions for homeowners.
ZP How does the current AHP model work from home purchase to homeowner refinancing?
JN After we purchase pools of non-performing mortgages, we contact the homeowners and offer three options: modification with an affordable payment and discounted principal; discounted cash settlement to release the mortgage; or a cash incentive to sign a deed in lieu of foreclosure. If the borrower does not respond, we proceed with foreclosure, which we hope will provoke a response.
ZP If the homeowner isn't interested in remaining in the home, how do you work to keep that home from becoming vacant if it's in a distressed area?
JN We try to sell as fast as possible to a local buyer in order to put the home back into service. Vacant homes often blight neighborhoods.
ZP You talk about the social returns of AHP—can you give us some numbers here—how many homeowners have been able to keep their homes? How many homes have you kept from becoming vacant?
JN 520 homeowners are still in their homes and 443 vacant homes have been returned to service.
ZP What is your favorite AHP success story?
JN A gentleman in Maywood, a Chicago neighborhood, purchased his home in 2006 near the top of the market for over $200,000 and owed over $195,000 on the mortgage we purchased. Values had plummeted in this neighborhood and, by early 2014, the home was only worth $32,000. This sounds extreme, but this collapse is common in low to moderate income neighborhoods throughout the U.S. This borrower paid his payments on time until 2010, when he was laid off from his 17-year job as a delivery driver. He fell behind on the mortgage payments as he could not find a new job. However, in 2013, he had obtained an insurance license and was again employed. He applied for a modification through Ocwen, his servicer, but was denied.
AHP bought this loan for $9600, 30% of the current value of the home. AHP then contacted the borrower with an offer to modify:
- Reduce payments from $1,449 monthly to $320 monthly
- Settle $43,471 delinquency, representing several years of payments, for $2000
- Discount principal balance from $195,418 to $29,600
The borrower was initially skeptical, as he thought our offer sounded "too good to be true." However, he was able to verify with Ocwen that we now owned his mortgage, so he took the deal. The deal we made here seems charitable, but if you look at the numbers, our first year return was greater than 50% and the next 20+ years are forecast at over 30%. Fantastically, our returns are often best with a consensual modification such as this, as we save the time and costs of foreclosing.
ZP You have changed your investor offering from a hedge fund model to a crowdfunded preferred returns model of monthly dividends. Explain the shift in the investment model.
JN We create closed-end investment funds using 506(c). This allows us to advertise and speak freely to the media, which are the primary benefits. Many investors prefer the monthly payout of preferred returns and the crowdfunding site provides maximum transparency for investors.
ZP While the housing industry has started to recover in many areas, there is still a backlog of foreclosures in many states. What do you see as the current state of residential real estate—where are we in the recovery?
JN The real estate market is like the economy at large. For the well-off, the real estate market and economy have recovered nicely. For those in the middle class, there have been improvements, but to a lesser degree. However, for families in many low and moderate income neighborhoods, there has been little-to-no improvement in housing prices or the local economies. These are the communities such as Maywood, which I mentioned, and cities like Ferguson, Missouri, where more than half the homes are underwater and getting worse. This large swath of America is being left behind and, as a result, this is where AHP concentrates our efforts. This is where we can have the greatest social impact and, because many larger funds shun these low-value loans, this is also where the margins are fattest and where we can generate the highest returns.
ZP Do you see the new rules for banks as hurdles to future real estate bubbles?
JN The new rules have constrained the ability to make loans to families who may be able to afford the homes but are self-employed or are buying low value homes. There are still issues. Markets have improved and may be peaking in some areas. We are seeing defaults in houses sold after the new rules went into effect. Better underwriting doesn't always guarantee there won't be defaults—job loss and other struggles can lead to defaults.
ZP Where do you see the future focus of AHP based on both need and opportunity?
JN There are still almost 10 million homes underwater on their mortgages in the U.S. And this is concentrated in the low to moderate income neighborhoods. This represents hundreds of billions in mortgages. The opportunity for both financial and social gains is tremendous. As a result, our next offering, which launches this week, is $30 million, which we intend to raise in the first quarter. By year-end, we expect our quarterly raises to extend to $100 million.
To prepare to scale, AHP has aligned with a broker-dealer, Wealth-Forge, which has licensed investor representatives working from AHP's offices. We also house a branch of a national servicer, Security National, in our offices. Finally, U.S. Bank is our custodian and trustee. We have had interest from some institutional investors and have created structures to maximize their comfort.
ZP How important is home ownership to the continued recovery and future growth of the U.S. economy?
JN A majority of families have traditionally accumulated wealth through home ownership. In lower income families, the house represented security in retirement. When you take that away, it only accelerates the expanding wealth disparity in the United States. The reduced value of homes in lower income communities is more than troubling. Fast forward ten to twenty years and this disturbing trend becomes an unsustainable situation. Much greater solutions are needed.
Half the Bike - Twice the Fun.
Chris Hoffmann, CEO and mastermind of RYNO, explains the relentless determination required to convert a napkin sketch into a sleek and sophisticated, single wheel Micro-Cycle.
Where Will Accredited Investors Put Their Money in 2015?
Predicting the next big trends in the financial markets is a fool’s game but our latest survey of accredited investors shows investor interest shifting away from managed public funds...